The statement of the Chairman of the Bank of Russia Elvira Nabiullina at the meeting of the Board of Directors on 7 February 2020
Today the Board of Directors decided to reduce the key rate by 25 b.p. to 6.00% per annum.
We allow for the possibility of lowering the key rate at the next meeting if the situation will develop according to our baseline projection.
Today, making a decision, we have considered a wide range of factors.
The first is the dynamics of inflation.
Annual inflation fell to 2.4% in January. Let me remind you that by the end of 2019 amounted to 3%. In itself, the deceleration of inflation from the level of December was expected and mainly due to the exit of the calculation of the VAT increase last year. However, inflation has decreased more substantially than projected.
The low inflationary pressure is also spoken and the monthly rate of inflation, adjusted for seasonality. Core inflation and other indicators of sustainable price dynamics are about 3% or below per annum.
In the first quarter, annual inflation, by our estimates, will be about 2%. In the middle of the year it will begin to rise gradually back to target. At the end of 2020, we keep the inflation forecast of 3.5–4%.
Now about the factors that determine the current dynamics of inflation, and why we believe it will come back to target.
Demand in the economy. Although in the second half of last year, we saw a recovery in domestic demand, external demand remained very weak. This including led to decrease of Russian exports. The dynamics of internal demand was very uneven during 2019. Weak demand in the first half of the year was reflected in a rapid slowdown of inflation to the current low level. Which began in the second half of the recovery in domestic demand and a further acceleration this year will be the main drivers of return inflation to the target.
The improvement in the dynamics occurred in parts of both consumer and government demand. Growth in private consumption contributed to the increase in real wages and disposable income, including the inflation rate. At the end of last year also began a more active execution of public spending have accelerated the direction of funds for the implementation of national projects. In our view, this year, these trends will continue.
I think it is important to separately pay attention to the following. From 2015 to 2019 macroeconomic policy – monetary-credit and budget – is largely determined by the need to adapt our economy to a sharp change in external conditions, which occurred in 2014. The need to increase the degree of macroeconomic stability, price stability, fiscal sustainability, reduce the economy’s dependence on commodity markets and geopolitical risks.
Today this problem is mostly solved. The adaptation period is completed. Happened fiscal consolidation, and even has some space to host a stimulating fiscal policy.
The annual inflation rate reached the stated purposes and from 2017 on average amounted to 3.7%. Last autumn we completed the transition from moderately rigid to a neutral monetary policy.
We in no way can not afford to treat lightly the achievements of the past five years. These achievements have created a Foundation for effective countercyclical macroeconomic policies.
Also I think it is important to note that the effects of fiscal and monetary policy would largely depend on the behavior, attitudes, private business and citizens. How they will react to lower interest rates, and how they use the additional income (save or spend), will do the business on the budgetary momentum of growth of private investment. And this, in turn, depends largely on the attitudes of producers and consumers, their faith in the future, the horizon of their investment projects and personal plans, from the business climate in General. And if these sentiments will remain cautious, restrained, and then measures both budgetary and monetary policy will have only limited effect on the expansion of aggregate demand and sustainable economic growth.
Returning to the current situation. Another factor of deviations of inflation from the target, and later return to it is the dynamics of the exchange rate. In the past year the ruble has appreciated significantly and is now still manifested a cumulative effect of this strengthening. Even with the fluctuations in January, the rouble remains stronger than a year ago. In the first half of the period effect of exchange rate changes and its disinflationary effect will be exhausted.
Food markets. Now it has been unusual for this time of year dynamics of prices. Adjusted for seasonality, food prices practically do not grow for several months. A significant role is played by the supply factor, the success of our agriculture. Reliably estimate the ratio of temporary and permanent factors in the food market is difficult. Remains the potential for productivity growth and increase in capacities. Simultaneously expands and export opportunities for the sector. With the expansion of production, exacerbated by competition. We believe that gradually this will lead to the alignment of the dynamics of food prices with prices of other goods and services.
Inflation expectations. In recent months, significant changes were not observed. Expectations on the horizon of the year generated close to 4%. Short-term price expectations of enterprises stabilized at historically low levels. Inflation expectations are now close to two-year lows. But we continue to regard this level as high. We still have to assess sabornost inflation expectations of both individuals and businesses, when will the slowdown in inflation and it will come back to purpose.
The second important factor for decisions in addition to inflation dynamics, is the dynamics of economic growth.
In 2019, GDP grew by 1.3% is the upper bound of our forecast interval. The growth of domestic consumption was slightly above our expectations, while external demand is weakening. As I said, the main demand growth and other indicators of economic activity came in the second half of last year, including in connection with the accelerated implementation of the budget.
Our view for the year 2020 and medium-term forecast at this meeting, the Board of Directors has retained virtually unchanged. This year economic growth will be higher than in the past, and will be 1.5–2%. This will also be a factor in the return of inflation to the target. We expect to maintain the growth rate of household consumption and significant acceleration in investment growth. The impact of budgetary measures on the forecast can be updated after making the Government’s package of amendments to the budget. In respect of external demand in the forecast laid export growth after its decline in the past year. But in General, its dynamics will hold back the moderate pace of global growth. In our opinion, the global economy may affect the course of the next phase of trade negotiations, as well as further development of the situation with coronavirus. While we regard his influence as temporary.
The third monetary conditions. They generally continue to soften.
This fully applies to price credit conditions. OFZ yields are at the lowest levels in recent years. Rates on Deposit and credit market continue to decline. The average rate of mortgage housing loans in December has updated the historical minimum of exactly 9% per annum. There is potential for further reduction of interest rates under the influence of decisions on the key rate.
While non-price conditions varied. So, they have tightened for consumer loans, due to the effect taken by the Bank of Russia macroprudential measures. Let me remind you, this is a deliberate action that we take to ensure the financial stability of the individual segments of the financial market. Under these conditions, the growth of unsecured consumer lending is slowing down and this trend will continue.
While there is potential to mitigate non-price terms of Bank loans in corporate segment. It is already gradually happening. Expanding crediting of corporate borrowers, the growing availability of long-term lending, including through the development of bond market. This also contributes to the emerging quality improvement credits.
Fourth. Externally, there have been some changes. But our assessment of cumulative impact has not changed. Signed trade agreement between China and the United States. That is, those significant risks that we saw in the sphere of international trade have not materialized. This positive news supported the market sentiment.
But new challenges have arisen that carry new risks for global growth. So, the situation of coronavirus is reflected on the economy of individual countries and the world as a whole. If to speak about Russia, the impact on our economy we currently estimate to be insignificant.
The reaction of the ruble to the marked fall in oil prices in January – early February and increasing volatility on external financial markets was moderate. The premium for country risk in respect of Russian assets is formed near historic lows, after she long and significantly declined in the past year. This contributes to macroeconomic stability and, above all, the accumulated safety cushion in the form of SWF.
Finally, about the risks of inflation.
First, let me remind you that we call the “risks of inflation” or “inflationary risks”. Baseline forecast of the Bank of Russia involves a trajectory of returning inflation to the target. When we talk about risks, we talk about the reasons due to which inflation can significantly deviate from the projected trajectory: up is preinflation the risks or down – is disinflationary risks.
Now, in the short run, the disinflationary risks clearly dominate.
Primarily it’s the dynamics of domestic demand – both consumption and investment. Their growth may be less than we expect, even in the face of continued easing of monetary conditions and stimulative fiscal policy. Such a scenario is possible in the absence of pronounced positive dynamics in business and consumer sentiment.
Another short-term disinflationary risk is more significant and sustained than we put in the baseline forecast, the impact on inflation of the strengthening of the ruble, which occurred last year.
There are a number of factors that are related both disinflationary and proinflationary risks. In particular, the dynamics of food prices, which is very volatile. Another such factor is the external environment. In the case of the deterioration of the situation with coronavirus or difficulties in the next stages of trade talks between the US and China may be volatility in financial and commodity markets, capital outflow and pressure on the currencies of countries with emerging markets, which in itself has proinflationary effect. At the same time, the deterioration on the background of the situation in the world economy, the decline in external demand for Russia, the slowdown of inflation in the countries – trading partners ultimately may become important disinflationary factors.
The nature of the impact of fiscal policy on inflation will depend on the speed and efficiency of implementation of planned measures of forecast horizon.
Among proinflationary risk we also continue to consider nezakonnye inflation expectations.
In addition, decisions on the reduction of the key rate can have more significant upward impact on inflation than we estimate in the baseline forecast.
Risks to the inflation Outlook in the medium-term horizon can be assessed as balanced.
In conclusion, a few words about the prospects of monetary policy.
Taking into account today’s rate decision, we have reached the lower bound of the range of 6-7%, which we consider as neutral with a target of inflation close to 4%. Once again, that in itself is an indicator of the neutral rate is not directly observed, it is conventionally approximately calculated. In addition, over time it may change under the influence of various factors. And we still have to assess and possibly Refine this range. While data for this objective that is not enough, it requires a longer time. Perhaps even more than one year.
But what is important to note now, when the key rate is on the lower end of our estimated range of neutrality. These borders – neither the top or bottom does not set the limits of possible movement of the key interest rate up or down. If this will require our assessment of inflation and economic situation, the key rate may be below the lower boundary of the neutral range. It would mean loose monetary policy. Similarly, when inflation deviated markedly upward from 4%, we preserved the key interest rate above the upper bounds of this neutral range.
We allow for the possibility of lowering the key rate at the next meeting, if we deem it necessary to return inflation to the target of close to 4%.
7 Feb 2020